Massive misjudgment of US labor market
Expectations for the labor market in May were grossly misjudged, even considering the extreme environment. The unemployment rate was reported at 13.3%. This is 1.4 percentage points lower than in April. The market had expected 19%. The market expected non-farm payrolls to decline by 7.5mn. The actual figure was an increase of 2.5mn, an error of 10mn. In manufacturing, the increase in employment was 225,000, where the market had expected a decline of 400,000.
The loosening measures that began have thus led to a much faster recovery of the labor market than expected. This is good news from the economy and gives hope. At the same time, however, it should not be forgotten that, in April, the decline in employment was just under 20.7mn, so the recovery still has a long way to go.
FOMC could become more specific
Next week, the FOMC of the US Fed will meet and decide on further monetary policy. The general direction will not change. The Fed will continue to signal that liquidity will be available in sufficient quantities and at low interest rates. We expect that isolated market speculation about a rate cut below zero will be rebuffed and that the FOMC's outlook will again not include the possibility of a rate cut. However, the FOMC may become a little more specific about how long interest rates should remain at current levels and announce a target period to give the markets more certainty.
This consideration could also apply to the Fed's purchases of securities. The currently unlimited purchases of US government bonds and mortgage bonds could be transferred to a new QE program, with specified monthly purchasing volumes and a timeframe. This would also give the markets a better planning capability for this area. Such a program could be announced next week, but details seem unlikely. Since the market assumes that the central bank's supply of liquidity will remain very generous and a QE program should meet these expectations, we do not expect a strong market reaction. In the end, however, the specifications of the program will be decisive.
Finally, next week - after an interruption in March - the estimates of the FOMC meeting participants on the most important economic variables will be announced again. The environment suggests that the dispersion of estimates will be much wider than usual. On the other hand, there should be broad agreement on the interest rate path. The estimates will presumably show no change in key interest rates over the entire forecast horizon - that is, until the end of 2022.
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